What Happens If I Take a Bigger RMD?

Once you celebrate your 72^nd birthday, the IRS requires you to take a minimum amount from IRAs or other tax-deferred retirement accounts. Most people take the minimum. However, that’s not always the right strategy. Sometimes, looking at the bigger picture might lead you to go bigger with your RMDs as well!

Let’s discuss examples. Let’s say Bill and Betty are ages 75 and 71. Bill has an IRA worth $850,000. Their retirement income consists of a pension totaling $34,000, dividends of $8,000 and combined Social Security benefits of $77,000. Bob’s 2023 IRA RMD is $37,118. Using the standard deduction of $28,100 (for a married couple where both are over age 65 plus a $300 charitable contribution deduction), their taxable income is $116,468. Federal taxes are $16,560.

Bill and Betty could recognize another $65,000 of ordinary income from his IRA before they jump into the 24% tax bracket. In 2024, Betty will have to start taking RMDs on her IRA—did we mention that her IRA is worth $1.5 million?—which will bump them into the 24% tax bracket. Because they will inevitably jumper into a higher tax bracket in the coming year, Bill should take another $64,000 from his IRA, filling up the 22% ordinary income bracket and reducing his RMD for 2023.

Another example: Alan is 81 and remarried ten years after his first wife passed. His IRA is worth $1.3 million, and his daughter is the beneficiary. His IRA RMD is $66,000 and he intends to be generous with charity this year, using about $30,000 for a Qualified Charitable Distribution (QCS). Based on a projection of his 2022 tax return, Alan could take another $22,000 from his IRA, taxable at 12%. His daughter Daphne is 51, has a high income and significant assets. He should consider filling up his own 12% marginal ordinary income bracket, because when Daphne starts taking her own beneficiary distributions, she’ll be facing high taxes.

Here’s what you need to consider when making RMD decisions:

1. Your tax bracket. How much more income can you realize while staying within your current tax bracket? Taxpayers in the 10-12% brackets should be extra careful of maxing out on ordinary income.
2. Your income. What does 2024 look like for your income? Will there be other sources of income, such as an inherited IRA, spouse’s IRA RMD, or annuity income to be considered?
3. Beneficiaries. How does your own tax rate compare with the tax rates of your beneficiaries? If you have a large IRA and your children have high incomes, could an inheritance push them into a higher tax bracket?
4. Medicare Premiums. Increases in income can lead to higher Medicare Part B and D premiums in coming years, so also keep that in mind.

It’s best to take the broader view when planning for RMDs and taxes. A short-sighted approach could end up being more costly for you and your heirs.